Reserve Bank of New Zealand – Inflation Dynamics Upside Down Down Under?

Thirty years after the Reserve Bank adopted an inflation targeting regime to deal with inflation that was too high, central banks now have a different problem: inflation being too low.

At a panel discussion yesterday at the Bank for International Settlements forum at the Bangko Sentral ng Pilipinas, Manila, Reserve Bank Assistant Governor and General Manager of Economics, Financial Markets, and Banking Christian Hawkesby discussed Inflation Dynamics and whether they were ‘Upside Down Down Under’.

“One of the key challenges of our time is for central banks, academics and financial markets to comprehend this new environment and deliver the appropriate policy response,” Mr Hawkesby said.

“It is testing our understanding of what is normal and welcome when it comes to inflation, interest rates, wage growth, and fiscal spending.”

At the panel discussion, Mr Hawkesby spoke about the Reserve Bank’s assessment of what has caused this period of low inflation; what had been learnt; and how this was being applied by the Monetary Policy Committee in 2019.

While some commentators have questioned whether monetary policy still works in the current environment, Mr Hawkesby outlined the body of research undertaken by the Reserve Bank that has found no evidence of any change in the effectiveness of monetary policy in New Zealand in the past 25 years. In other words, that that monetary policy does still have bite even in this low interest rate world.

“Our assessment is that monetary policy is still effective in influencing inflation in New Zealand, through a number of channels.

“This is one of the factors that motivates our continuing determination to set policy, whether with conventional tools or unconventional tools, to achieve our dual mandate of price stability and maximum sustainable employment.”

On the decision by the Monetary Policy Committee to lower the Official Cash Rate by 50 basis points to 1.0 percent at its August meeting, Mr Hawkesby noted that “decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock.”

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